Stepping on a Rake: the Fiscal Theory of Monetary Policy

John Cochrane

No 22979, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The fiscal theory of the price level can describe monetary policy. Governments can set interest rate targets and thereby affect inflation, with no change in fiscal surpluses. The same basic mechanism describes interest rate targets, forward guidance, open market operations, and quantitative easing. It does not require any monetary, pricing, or other frictions. In the presence of long-term debt, higher interest rates lead to temporarily lower inflation, a challenging sign. I derive and replicate the results of the Sims (2011) “stepping on a rake” model, which first produced this negative sign, and produces realistic impulse-response functions. I show that Sims' result is robust to many model features, but essentially requires long-term debt.

JEL-codes: E31 E4 E5 (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-mac
Note: AP EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as John H. Cochrane, 2017. "Stepping on a Rake: the Fiscal Theory of Monetary Policy," European Economic Review, .

Downloads: (external link)
http://www.nber.org/papers/w22979.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:22979

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w22979

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().